(Bloomberg) -- Alibaba Group Holding Ltd. has moved a step closer toward getting booted off US stock exchanges for American inspectors not being able to access to financial audits.
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The US Securities and Exchange Commission on Friday added the largest US-listed Chinese company to a growing roster of firms that face removal because of Beijing’s refusal to permit American officials to review their auditors’ work. The publication of the businesses’ names, which was required by a 2020 law, starts a three-year clock to a final delisting.
The SEC’s move adds to a wall of worry for investors, who had already been assessing myriad concerns including earnings risk, the impact of Jack Ma’s reportedly ceding control of his fintech arm Ant Group Co. and persistent Covid risks in China. Alibaba’s US-listed shares extended their declines for a third week and have slumped 21% in July, its worst month since November 2021.
“Sentiment has turned sour again around China,” said Adam Crisafulli, the founder of Vital Knowledge.
Wall Street’s main watchdog is cracking down on New York-traded firms with parent companies based in China and Hong Kong.
Dozens of other countries permit the US audit inspections, giving American officials the go ahead to interview local accountants and scrutinize the documentation underlying their work. China and Hong Kong have refused, citing confidentiality laws and national security concerns.
With the clock ticking, some Chinese firms including Alibaba and Kingsoft Cloud Holdings Ltd. said this week they are seeking primary listings in Hong Kong, joining Bilibili Inc. and Zai Lab Ltd. which made the move earlier. The switch could help companies tap more Chinese investors while providing a template for other US-listed Chinese firms that face delisting should Washington and Beijing fail to settle audit disputes.
A primary listing is a precursor to joining the so-called Stock Connect program, which allows millions of mainland investors to directly buy stocks in Hong Kong. That frees up a large new pool of capital that may become especially crucial if China’s e-commerce leader gets delisted.
The SEC’s addition of firms from Alibaba to Pinduoduo Inc. to its list following the publication of their 2021 annual financial statements has jarred global investors.
Beijing has discussed with American regulators the logistics of allowing on-site audit inspections of Chinese companies listed in New York, Bloomberg News reported in April, spurring hopes for some kind of deal. But Securities and Exchange Commission Chair Gary Gensler has repeatedly said it’s unclear if American and Chinese authorities will come to an agreement.
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Alibaba would be by far the largest Chinese company to get kicked off US bourses if regulators fail to strike a pact. The company has argued that, since its 2014 New York IPO, its accounts have been audited by globally accepted accounting firms and should meet regulatory standards.
Earlier this week, Gensler reiterated that Chinese and American officials need to reach a deal “very soon” for the next steps to take place to avoid a halt to the firms trading on US exchanges.
(Updates with closing share move in third paragraph.)
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